A report released on Thursday by the Federal Reserve Bank of Boston stated that the implementation of the full suite of tariffs proposed by the Trump administration would have significantly increased inflation levels that were already elevated. The report highlighted that the combination of 25% tariffs on Mexico and Canada, along with a 10% tariff on China, could raise underlying price pressures by up to 0.8 percentage points according to the central bank’s preferred price gauge, the personal consumption expenditures price index.
This potential inflationary impact, with the PCE price index rising 2.6% in December from the previous year and core PCE up 2.8% over that period, could pose challenges for the Federal Reserve, especially since it is currently dealing with inflation above its 2% target. Despite the Fed's expectation for gradual easing of inflation pressures, the uncertainty surrounding the impact of tariffs on consumer prices adds complexity to the inflation forecast.
Boston Fed President Susan Collins emphasized in a television interview that broad-based tariffs would likely lead to price increases not only in final goods but also in intermediate goods. The Fed, having paused its rate cuts in January due to uncertainty about the economic impact of Trump's policy changes, is closely monitoring the situation to gain clarity on the administration's trade policies.
The report's analysis focused on the tariffs initially planned for Canada, Mexico, and China, though recent developments have caused uncertainty regarding the implementation of these tariffs. The study assumed that consumers would bear the costs of tariffs, but noted the potential mitigating factors of general equilibrium effects, retaliatory actions, and domestic and foreign monetary policy which could temper the inflation estimates due to their impact on economic growth.